Shooting the breeze at Infigen

There’s no doubt the main game in the energy sector is the NSW energy privatisation process.

But further down the food chain, there’s some turning their thoughts to whether activist hedge fund The Children’s Investment Fund Management (TCI) has a plan to restore value to troubled wind farm operator
Infigen Energy
.

The former Babcock & Brown vehicle has had a turbulent week. On Monday night, its chief financial officer left the company, just days after chairman Graham Kelly and another director, Tony Battle, said he would not stand for re-election after TCI demanded a board seat.

The board members didn’t leave quietly – they released a highly unusual statement airing their concerns the group was not being run in the interests of minority shareholders.

Understandably, some interpreted this as a signal that TCI, which owns about 21 per cent of the stock and has a well-earned reputation for making things happen, was ready to set something into play.

But that might be wishful thinking.

While Infigen’s register has collected a number of hedge funds – TCI, Kairos Investment Management and, most recently, Leo Funds Managers – attracted by the potential value in the business, none have managed to kick-start the share price.

Infigen’s shares have been in a steady decline, trading well below Macquarie Equities’ 12-month target of $1 a unit.

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Partly that’s due to difficult external factors including, most significantly, poor Australian renewable energy certificate (REC) pricing because of oversupply.

But it’s also because the failure to sell the company’s US assets earlier this year and break out the local assets is still dragging on the company.

The US assets are effectively in cash-sweep mode, so any earnings go straight to the banks.

For any potential bidder, that makes it tricky to fix much equity value on the assets, although Macquarie analysts argue that $US1.4 million per megawatt is reasonable, despite the offers during the sale process coming in just above book value levels of about $US1.23 million per megawatt.

Despite intermittent speculation that some groups may be eyeing the group (most recently Chinese power company Datang cropped up), the US assets may be enough to deter any attractive offer.

That structure has ignited the occasional debate about whether a demerger would suit Infigen – which, ironically, was considered just a few years ago to be the best placed of the former Babcock & Brown satellites.

The thinking is Infigen could be divided into “good" and “bad" companies – as was done with Macquarie Infrastructure Group, a strategy that flushed out a buyer for Intoll.

Such a strategy would also make it easier to fund growth plans for the Australian assets.

With cash of $227.3 million at June 30, Infigen plans to construct 160 megawatts of additional Australian power generation at a cost of about $380 million.

However, as it stands, the company has a market capitalisation of about $570 million, which may mean it is a little small to attract interest if split in two.

No doubt these are all factors that TCI, Infigen’s new chairman Mike Hutchinson and the company’s traditional advisers UBS are considering.

Infigen shareholders are due to meet tomorrow for the company’s annual meeting, and will be keen to hear the new chairman’s strategy.

However, it’s thought likely Hutchinson will want some more time to assess the situation.

In many respects, the best thing that the company could do is wait.

If REC prices recover and appetite for assets improve, it may be possible to revisit a sale process.

Failing that, TCI and the other hedge funds will need to come up with another plan.